EghtesadOnline: The Central Bank of Iran’s Public Relations Department has released a report on the supply of subsidized foreign currency to import essential goods.
Also known as necessity goods, essential goods are products consumers will buy, regardless of changes in income levels.
Amid high inflation and diminished purchasing power, the Iranian government has sought to ensure a steady supply of essential goods at subsidized prices.
According to the report, in the current fiscal year (March 2020-21), as per the decision of the government’s Economy Council, a total of $8 billion at the rate of 42,000 rials per dollar will be allocated to the supply of essential goods.
Of the total sum, $5.5 billion will be offered to import essential items, namely corn, oilseeds, raw vegetable oil, soybean meals, barley and wheat, $1.5 billion to import pharmaceuticals and $1 billion to import medical equipment.
The government decided to supply $4 billion to import essential goods and $1 billion to import pharmaceuticals and medical equipment in the first half of the current year (March 20-Sept. 21).
The H1 statistics show CBI has supplied $1,446 million to imports of corn; $714 million to imports of oilseeds; $202 million to barley; $757 million to raw vegetable oil; $509 million to soybean meals; $290 million to wheat; $40 million to fertilizers; $15 million to paper; $544 million to medical equipment and $750 million to import pharmaceuticals and their raw materials.
Despite restrictions resulting from US sanctions, the central bank provided $5.267 billion in subsidized forex for the provision of essential goods in H1 in cooperation with the Industries Ministry, Agriculture Ministry and Health Ministry.
Some misuse of payments and practices aimed at maximizing profit during distribution and sales ended up to the detriment of people and subsidized goods were provided at higher prices than the actual end costs. It is up to the media and experts to probe and analyze why these items are not put at consumers’ disposal in accordance with the subsidies they received, the report concluded.
Earlier, Mohammad Reza Kalaami, the secretary of Market Regulation Headquarters, said out of $6 billion allocated for the subsidized imports of essential goods for the current fiscal year, the central bank supplied $3 billion in the first half of the year.
“CBI now allocates subsidized US dollar at the rate of 42,000 rials to five items, namely raw vegetable oil, oilseeds, soybean meal, barley and corn. Agriculture Ministry unveiled a website named ‘Bazargah’ in the month ending March 19 to streamline the clearance of imported animal feed from customs and ports. Using the ministry’s website, chicken farmers would be able to receive animal feed directly,” he was quoted as saying by Fars News Agency.
Subsidy Policy Under Criticism
CBI’s statement and government officials’ reactions come, as critics are getting louder over the country’s subsidy policy by the day.
Following the re-tanking of the national currency in early 2017, the government introduced stringent rules like banning the import of non-essential goods, especially those produced inside the country (known as Group IV goods). It allocated subsidized currency at the rate of 42,000 rials to a dollar to 25 categories of goods (also known as Group I or essential goods) to help protect consumers against galloping inflation, rampant price gouging and hoarding, not to mention the high and rising cost of living.
Two other categories of imports were also defined: Group II, which mostly included raw materials, intermediate and capital goods, and Group III consisting of essential consumer goods.
Importers of products in Group II were to meet their forex requirements from the secondary forex market. Importers of goods in Group III could buy hard currency from exporters who were not required to offer their forex earnings on Nima.
Over the past year, the government has removed items, including red meat, butter, rice, pulses, tea and sugar, from the list of basic goods entitled to subsidized currency.
Investigations by the Persian economic daily Donya-e-Eqtesad show the allocation of subsidized forex has failed to keep consumer prices in check; the inflation rate of essential goods was even consistent with that of other items and the removal of items from the list of subsidized imports has at times left no impact on their prices.
To contain the price of chicken, the government allocates cheap forex for the import of soybean meal. Chicken prices increased by 135% from March 2018 (when the subsidized import policy was introduced) to Sept. 2020, whereas the average consumer inflation went up 120% over the period.
Rice was the second biggest import of the country in the year ending March 2019 with $1.6 billion, registering a 32% increase year-on-year. This came as according to the Statistical Center of Iran’s data on the annual budget of households, rice consumption decreased by 16.8% YOY. The mounting imports of rice continued into the following year (March 2019-20), which was indicative of the fact that demand for subsidized forex to import rice had increased.
Since the introduction of the policy until this spring, rice was subject to import subsidy policy. In the month ending May 20, the government delisted the item to curb the losses inflicted on local farmers.
SCI’s figures show that the inflation of imported rice stood at 65% over the period, i.e., from the introduction of the policy up to the time the item was removed from the list of subsidized imports. The average Consumer Price Index grew by 89% over the period.
What became of vegetable oil imports corroborates the failure of the policy to produce the desired results: Vegetable oil consumption declined by 39% in the year ending March 2019 whereas its imports grew by 19% compared with the year before. Imports of vegetable oils increased by 31% in the year ending March 2020 compared with the year before.
Despite receiving subsidies, the item saw an 83% growth in consumer prices from the introduction of the policy in 2017 to the month ending Sept. 21, 2020. The average rise in CPI was 119% over the period.
The country’s tea imports increased by 60% over nine-month period to Dec. 21, 2019 YOY. Note that tea was removed from the list of subsidized imports on June 8, 2019.
A look at the numbers concerning tea imports would reveal some interesting truth: Imports of tea grew exponentially over two months to June 21, 2019, following the announcement of the government’s decision on discontinuing the allocation of cheap forex to the item’s imports to the date it was implemented. In fact, the month ending June 21 was the last chance to enjoy government’s rent.
Tea imports plummeted in the following month (June 22-July 22, 2019). The rise in tea prices from the introduction of the policy to June 21, 2018, was 66%, even more that the average consumer inflation. Since the month ending June 21 to this September, the average CPI increased by 40% while the average prices of imported tea surged 94%. In fact, tea is one of the few items inflation of which was impacted by the removal from the list of subsidized imports.
Butter was among items that government decided to remove from its subsidy program in the early months of last year. Demand for imports of butter increased sharply since the government made its decision public to the time it carried out the plan. Butter imports over three months to June 21, 2019, outweighed total imports of the item over the entire year ending March 2019. Butter inflation stood at 44% from the month ending March 20, 2018, to June 21, 2019. Average CPI was 56% over the period. Following the discontinuation of subsidy allocation to butter imports, the item’s CPI increased 20% from June 21, 2019, to September 2020, i.e. half the average CPI. Unlike tea, the removal of subsidy has resulted in market price stability for the item.
Red meat inflation stood at 137% from the introduction of the policy up to the time the item was delisted (the month ending June 21, 2019), that is twice as high as the average CPI growth over the period (56%).
The desired market stability was achieved after the government no longer allocated subsidies to the item’s imports: Lamb prices have increased 6% while beef prices have decreased 5% since June 21, 2019, up to September 2020.
Gov’t to Continue Subsidy Policy
The government plans to continue subsidizing essential goods in the next fiscal year (March 2021-21).
According to Vice President Mohammad Baqer Nobakht, who doubles as the head of Iran’s Plan and Budget Organization, the government will channel earnings from the export of oil to import of essential goods at the subsidized rate of 42,000 rials per US dollar.
He made the statement on the sidelines of a meeting of the so-called Budget Headquarters 1400 (the Iranian year starting March 2021) held on Aug. 22.
Discussions centered on the makeup of the headquarters, the Joint Commission—a parliamentary body responsible for reviewing the budget bill as well as the five-year economic development plans—and eight specialized taskforces.
These meetings are being held regularly up until Budget Day (the day that the government presents its budget to the legislature for approval), i.e. Dec. 2.